College is expensive, and as a parent it can seem daunting to figure out how you’re going to get your child through college without pushing the limits of your credit card or refinancing the house. With smart investments, you can generate the growth and funds to get JR to college without breaking the bank.
One of the first basic and seemingly obvious steps, is to cut unnecessary expenses to increase the amount of money in your budget to invest with. Ultimately, in the end, you’ll need to figure out what investments are going make your portfolio work for you, giving your child an advantage over others that ultimately end up in debt just to pay for college. We did some research with the help of our Motley Fool researchers here;
3 kinds of stocks
As with any investment goal, the best portfolio for college savings acknowledges the time frame you have to invest as well as the competing considerations of risk and reward that you have to weigh. If you start early, then you may have 15 to 20 years before you need to worry about exhausting your college fund, giving you maximum flexibility to invest. But even if you get off to a late start — say, with just eight to 10 years left — you can still use these three categories of stocks to help guide you:
- High-impact growth stocks. Aggressive companies with good growth prospects can give you very high returns, but they’re not for the meek.
- Undervalued opportunity stocks. Taking advantage of values in the market gives you an inherent advantage over paying full price.
- Cash-paying dividend stocks. You’ll eventually need to start taking money out of your college portfolio, and dividend stocks will help you with income without having to sell shares.
- Let’s take these in turn.
- Growth stocks give you the best chance to turn small investments into huge payoffs. But they also come with higher risk, and their popularity can make them more expensive than they’re worth. The current economic troubles have been problematic for many growth stocks, but some have bucked the trend.
- Intuitive Surgical (Nasdaq: ISRG) continues to see its unique robotic surgical devices used in new procedures, and even in a recession, growth has continued. With such potential, even paying 30 times 2011 estimates may not be too pricey. A riskier play is A-Power Energy (Nasdaq: APWR), which trades at a forward earnings multiple of just 6. However, it’s disappointed investors the past two quarters with earnings misses, so you need to have confidence that small and medium-sized users will want to generate their own power.
Growth isn’t everything. Even slower-growing powerhouses can be great investments over time when the price is right. Right now is a great time for value-priced stocks. JPMorgan Chase (NYSE: JPM), for instance, trades at book value and 12 times earnings and appears to have emerged largely unscathed from the financial crisis. Transocean (NYSE: RIG) will be mired in the aftermath of the Gulf oil spill for some time, but at seven times earnings and below book value, it’s a value play that could pay off if the worst-case Gulf scenario doesn’t play out. Great dividends
More than anything, dividend-paying stocks do what other investments don’t: show you the money, quarter in and quarter out. The best long-term plays combine a good yield with great ongoing dividend growth. Chevron (NYSE: CVX) is a great example of such a stock. Paying 3.5% now, Chevron has increased its dividend at a 10% clip over the past five years, and has a 19-year history of hiking its payouts every year. Procter & Gamble (NYSE: PG) has an even more impressive track record, with 56 straight years of higher dividends and around 12% annual dividend growth since 2005 to go with its 3% yield. Alternatively, a dividend ETF can help with this part of your college savings. Vanguard Dividend Appreciation (NYSE: VIG) pursues stocks like Chevron and P&G among dozens of others. It’s a simple way to get broad dividend stock exposure.
Using stocks to get your child through college, definitely isn’t a sure thing, but these stocks seemingly have all the right qualities of a good investment, and these aren’t the only ones out there with the same benefits. Do your research and follow the simple rules, and you should be at the very least, able to save up a good amount for college.